HDFC Life Insurance Company - Recovery well on track post Covid-19 dip - ICICI Securities

HDFC Life (HDLI) continues with its diversified product/distribution strategy with strong recovery in Q2FY21 (Total APE growth of 21% in Q2FY21 compared to 30% decline in Q1FY21) leading to 135bps QoQ improvement in VNB margin to 25.7%. H1FY21 VNB margin stood at 25.1%. VNB grew 22%/89% YoY/QoQ to Rs5.5bn in Q2FY21. Product suite is stronger with new high-margin par and group protection products. Persistency has also recovered for ULIPs to pre-Covid levels, while non-par book intrinsically has higher persistency. The strong volume performance in H1FY21 and improving outlook on credit disbursement on a backdrop of business recovery from Covid-19 posit tailwinds to VNB estimates.

- Upgrade to BUY from Add. We value HDLI at 40x new business value of Rs26bn in FY22E (unchanged). At our target price of Rs663, FY22E P/EV stands at 4.6x.

- Embedded value has increased from Rs206bn in FY20 to Rs233bn in H1FY21. We factor EV of Rs246bn/Rs290bn (unchanged) in FY21/22E based on 7.5% unwind, 26%/30% VNB margin and 3%/20% APE growth in FY21/22, respectively. There could be higher-than-expected APE growth in FY21 considering the H1FY21 performance and lower base of H2FY20. Additionally, the recovery of credit protect (down 74%/36%/53% YoY in Q1/Q2/H1FY21) would provide additional margin and volume tailwinds. (Refer Table 5 for credit commentary of HDFC Life's partners)

- Bancassurance outperforms (with large impact of HDFC Bank) in Q2FY21. In terms of individual APE, bancassurance and agency channel registered growth of 38% and 8% YoY, respectively, in Q2FY21. HDFC Bank remains ~70% of the banca mix of HDLI. Management indicated green shoots in other channels in Q2 (ex-HDFC banca channel grew 6% in Q2FY21).

- Operating performance remains disciplined: 13th month persistency ratios for individual business improved from 86% in H1FY20 to 88% in H2FY22 (benefits of guaranteed savings that should continue). 61M persistency ratio remained steady at 53%. Management indicated that persistency in ULIPs has been restored to pre- Covid levels. As on H1FY21, solvency ratio stood at 203%. Total expenses to Total premium stood 15.2% in H1FY21 vs 19.2% in H1FY20. Some cost savings will get reversed with expected growth.

- HDLI is adopting a mezzanine protection pricing strategy between IPRU Life and SBI Life. HDLI has been reserved to increase protection pricing only driven by actuarial judgements. This is a mezzanine strategy between IPRU Life (intended to fully pass reinsurance rate hikes) and SBI Life (no increase in protection prices yet).

- Balanced product mix remains the strategy; new products to strengthen the product mix. Based on individual APE, ULIP, par and non-par savings remain at 23%, 33% and 30%, respectively, of the mix in H1FY21. There is a rise in par mix (new product Sanchay Par Advantage has higher margin profile because of higher duration).

Shares of HDFC Life Insurance Company Ltd was last trading in BSE at Rs.570.65 as compared to the previous close of Rs. 561.45. The total number of shares traded during the day was 138336 in over 6297 trades.

The stock hit an intraday high of Rs. 574.25 and intraday low of 564.6. The net turnover during the day was Rs. 78799965.

Source : Equity Bulls

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